KUHN CAPITAL Wednesday, March 21, 2018
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M&A Caveat Emptor


A recent court case reminded us again of how purchase agreements can be treacherous if not properly constructed.

The case features Abry Partners, a private equity buyer, vs. F&W Acquisition (F&W Publications), a book publisher. F&W was a portfolio company of Providence Equity Partners.

Abry claimed with merit that F&W had misrepresented its condition. That is, F&W’s order fulfillment system turned out to be in shambles, subsequently causing the new owner to lose business, most spectacularly that of Amazon.com. Abry claimed F&W’s value was actually $300 million, not the $400 million it paid.

But the judge recognized that the purchase agreement not only contained a “no reliance” clause on seller representations, but also capped Providence’s liability exposure at $20 million, or a miserly 4% of the purchase price.

While the judge disallowed Providence’s motion to dismiss the case, he went on to state that Abry had to prove fraud in a separate case in order to rescind the transaction and to collect damages in excess of $20 million. Good luck: faced with the difficult task of confirming fraud, Abry settled out of court.

Lessons learned:
• Define damages in the case of fraudulent, intentional, willful or wanton misconduct, recklessness and gross negligence.
• Increase the seller’s liability cap to something more like 25% of transaction value. While the exact amount is obviously negotiable (and 25% would have made Abry whole), we regularly see higher caps than this.
• Specify that the cap does not apply in cases of fraud or intentional misconduct, and avoid the requirement to arbitrate such instances. In other words, when this level of abuse may have occurred, preserve your right to a trial.
• Require that not only the seller, but the seller’s shareholders, make all reps and warranties, and that the buyer may seek uncapped indemnification from seller's shareholders in the event of a breach.
• Try to avoid agreeing to a seller’s assertion that “no reliance” can be based on its representations. Agreeing to “no reliance” means that everything you know about the target you must uncover and reconfirm independently.
• Conduct thorough due diligence!

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